Did overconfidence play a part in the banking crisis?

Overconfidence could have been partially responsible for the banking collapse – and here’s why.

People who are overconfident fool others into believing they are more talented than they really are and those with an inflated view of their own abilities are more likely to succeed at work.

In turn, that same group is more likely to overestimate other people’s talents, and therefore take greater risks. It could partially explain banking collapses and other disasters, according to new research.

Seen from above, students in graduation caps and gowns
(John Walker/Flickr)

Academics from Newcastle and Exeter universities are behind the new study which is published in the journal PLOS ONE.

Joint lead author Dr Shakti Lamba, of the University of Exeter, added: “If overconfident people are more likely to be risk prone then by promoting them we may be creating institutions, such as banks and armies, that are more vulnerable to risk.”

Three students on a campus
How people see you is almost as important as your actual grades (Tulane Public Relations/Flickr)

To work out the theory, 72 students were asked to rate their own ability and the ability of their peers after the first day of a course.

Of those, 32 students (about 45%) were under confident in their ability as compared to their final mark, 29 students (40%) were overconfident and 11 (15%) were accurate in their assessments of their own ability.

They found that students who predicted higher grades for themselves were predicted to have higher grades by others, irrespective of their actual final score.

The same applied to those who were under confident. The task was repeated after six weeks of the course when the students knew each other better and the findings remained the same. Those who were overconfident were over-rated by others.

Is this student overconfident or underconfident? It could affect the opinion of their peers (Tulane Public Relations/Flickr)
Is this student overconfident or underconfident? It could affect the opinion of their peers (Tulane Public Relations/Flickr)

Study author Dr Vivek Nityananda, research associate at Newcastle University’s Institute of Neuroscience, said: “These findings suggest that people don’t always reward the most accomplished individual but rather the most self-deceived.

“We think this supports an evolutionary theory of self-deception. It can be beneficial to have others believe you are better than you are and the best way to do this is to deceive yourself – which might be what we have evolved to do.

“This can cause problems as overconfident people may also be more likely to take risks.

“If too many people overrate themselves and deceive others about their abilities within organisations, then this could lead to disastrous consequences such as airplane crashes or financial collapses.”

The study also found that workers who underestimate their own skills are seen as less able than they actually are by colleagues.

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